Macro Equity Market States versus Canterbury Portfolio Market States

Posted on February 16, 2015

Canterbury Portfolio Thermostat Weekly Update 2/16/2015

The Portfolio Thermostat identifies 12 different market environments called “Market States.” Each Market State has its own unique characteristics and tendencies. Market States are used to provide a “big picture” view of the current market’s S&P 500’s characteristics (the S&P 500 is commonly referred to as the “market”). There are 5 Bullish (rational – low volatility) Market States; 4 Bearish (volatile and/or increasing volatility) Market States; 3 Transitional Market States (indicating caution).

Market State for Macro Equity Market (S&P 500): 2/16/15

Market State 5 (MS 5):

Characteristics of Market State 5: Long Term (Bullish) Short Term (Neutral/Bullish)

Consecutive trading days in MS 5: 7 days.

Current Market State: Description

Market States 1 through 5 have positive or bullish attributes. Market State 5 tends to have more volatility than the other 4 “bullish” - Market States. MS 5 will typically not last long and will typically shift after about 2 to 4 weeks.

Canterbury Volatility Index (CVI): The current reading is CVI 72. Volatility, as measured by the CVI, has been declining (bullish) for almost two weeks. The peak in volatility was recorded on 2/03/2015 at CVI 77. We would need to see a 10% total decline from the peak (CVI 69) in order to move back to the Portfolio Thermostat’s “lowest risk” market environment.

Overbought/Oversold Indicator shows the market 58% overbought(neutral). This indicator actually looks pretty positive considering that most equity markets are coming off a good week. Markets will typically approach a short-term overbought (over-extended) condition following a strong week and new highs.

Market States and CVI - Revisited

The Portfolio Thermostat’s Market States and CVI (volatility) are used to provide the big picture “macro view” for the global equity market. The proxy for the “market” is the S&P 500 index. Over time the “market” will experience all 12 “macro” Market States (bullish and bearish periods). The macro market’s CVI volatility will range from very low (safe) to very high (risky).

All publicly traded securities represent an ownership interest in an underlying asset (company, companies, or other types of assets). The current market price is determined by the changing equilibrium between supply and demand. As a result, values of traded securities will fluctuate over time.

A value of a portfolio will be subject to a wide range of fluctuations if its’ asset allocation and securities owned remain generally the same (buy and hold). On the other hand, a managed Portfolio Thermostat portfolio will adjust its ETF holdings (securities owned will change - variable) for the purpose of maintaining a stable portfolio through variable markets.

The goal is for the Canterbury portfolio to maintain a bullish Market State and low CVI volatility through variable markets. A portfolio’s securities must change holdings (variable asset allocation and ETF holdings) so that the portfolio itself can adjust to maintain a low level of risk and remain in bullish Market States (bull-MS 1 through 5).

The Portfolio Thermostat (Canterbury Portfolio’s) CVI: The current portfolio reading is CVI 54: Low Risk (Bullish). Volatility, as measured by the CVI, has been stable/sideways since mid-December (bullish).

Bottom Line:

The Canterbury portfolio of ETF holdings are purchased, or sold, based on what objective rules define as the combination that produces the most efficient and optimized portfolio. Each individual ETF holding is much less important than the synergy it can bring to produce the best portfolio to match the existing market environment. In other words, individual ETFs “rent” space in our portfolio. The Portfolio Thermostat will hold an ETF as long as it accomplishes the role needed to maintain an efficient (low risk) portfolio through the current market environment.

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.